iPad 2 Extends Apple's Lead: Apple Will Dominate The Tablet Market For Years

Apple's iPad 2 isn't a massive advance over the first iPad, but with hardware, software, apps, distribution, and pricing combined, it is still by far the best tablet on the market.

Despite recent announcements from Google, Motorola, Samsung, HP, and RIM, we still expect Apple to dominate the tablet market for years.

While competition will intensify, the iPad will continue to be the best all-around product for consumers, and therefore Apple should maintain very high market share (settling to 50%-60%) for at least several years.

But, you may say, Google Android just kicked Apple's butt in smartphones! Why won't this happen in tablets?

The fundamental difference between the tablet market and the smartphone market is carrier distribution.

Whereas smartphone distribution is dominated by wireless operators, we expect carriers to play a relatively small role in tablet distribution. Tablet sales will be centered around electronics retail -- the Apple store, Best Buy, Walmart -- and big e-commerce, and not around carrier stores.

In mid-January, we asked Business Insider readers, "If you were going to buy a tablet, where would you buy it from?" Only 6% said they would buy from a carrier retail store or website. Meanwhile, 51% said they would buy it from an Apple retail store or Apple.com -- where they only sell iPads. Another 24% said they would buy from Best Buy, Walmart, other retail, or associated e-commerce.

(That is, in part, because we believe that most people will not want to sign 2-year wireless data contracts for tablets, and therefore won't care as much about carrier-subsidized pricing. So while carriers have taken it upon themselves to start supporting tablets like crazy, we don't think they will ultimately do much of the tablet selling.)

So let's walk through the typical tablet-buying routine.

If you go into the Apple store, you know what to expect -- big tables with iPads laid out to play with. Either you'll buy one or you won't.

In a Best Buy or Walmart, we assume you'll see a shelf with iPads and a few other tablets set up for demo. The iPad hardware and software will likely be nicer than the competition, and if the salesperson is trained, they'll be able to explain that Apple's apps and media ecosystem is still the best. (Apple should continue to have the best commercials and marketing, too.)

Then it will come down to price.

We believe Apple will continue to price the iPad aggressively so it does not lose this market to cheap, inferior competitors.

It may not immediately be as profitable as some of Apple's other businesses, but we believe Apple knows how important the iPad is to its future, and how much of a head start it has. So we don't expect Apple to allow any company to significantly underprice it. (Here are more details about how Apple can price iPads so cheaply.)

And by making smart supply chain decisions, like investing $4 billion in displays in advance, Apple should be able to keep its costs in line to support these pricing decisions -- offering not only a better product, but a better value than its competitors.

With these factors in mind, within a couple of years, we expect Apple to maintain the lion's share of the growing tablet market -- settling at least somewhere in the 50% to 60% range -- with Android next, and the rest splitting the difference, including RIM's PlayBook/QNX platform, Palm's WebOS, and whatever Microsoft eventually brings to the game.

The big question on our minds right now is whether a separate market for "business" tablets opens up, versus "consumer" tablets, and whether Apple will perform as well for those corporate customers.

Apple simply doesn't have the direct enterprise sales that HP, RIM, and Microsoft do. Will that market be large and significant enough to shift the balance? Will a HP or RIM device become the tablet equivalent of the ubiquitous Dell PC workstation? Or will Apple's superior hardware and development tools help it keep its lead?

Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.

Apple iPad 2

The iPad should continue to dominate the tablet market for years to come, settling to at least 50% market share. (Currently around 90% or higher, we'd estimate.)

While Apple will continue to receive more credible competitors, we expect Apple to maintain its lead in hardware and software quality, media ecosystem, marketing and advertising, and pricing. The iPad 2 announcement, where Apple showed off both amazing hardware and software, assured us of this. And iOS 5, expected later this year, could bring even more advantages in software and services.

Apple also has the exclusive advantage of the Apple retail empire, which could be a key strategic asset in the tablet market, especially in the crucial U.S. market -- both in terms of distribution and profit margins.

Google Android

Google will likely be the second-place team in the tablet battle. Ultimately, it could command around 30% of the market. The main problem is that there is no simple reason to buy an Android tablet instead of an iPad. (We don't view Adobe Flash support as a good-enough reason.)

The wildcard for Android is pricing. If, for whatever reason, Android tablet makers can eventually offer VERY GOOD tablets at prices FAR below Apple's, then Android has a chance to dominate. But this will be a real challenge, as we believe Apple is making smart supply chain decisions so as not to get undercut.

While Android has attracted many of the top mobile phone makers to use it as the basis of their tablets -- Samsung, Motorola, LG, HTC, Toshiba, etc. -- Android simply is not as good as Apple's iOS platform. Even the new 3.0 "Honeycomb" version.

If a tablet buyer plays with an Android tablet for a few minutes and an iPad for a few minutes, we would expect most to choose the iPad. There is simply no reason not to.

Moreover, while Android's massive success in smartphones has come as a result of HUGE support from many of the world's top mobile carriers, we don't expect carriers to play an important distribution role for tablets. So, many of the announcements you see today may ultimately prove meaningless.

(Sure, there are some devout Android "open!" supporters, and some people who hate Apple. These people will be natural Android customers. But we don't think the majority of consumers care about this at all.)

More broadly, RIM has displayed very little competence developing software or platforms since the iPhone launched in 2007, and there's little reason to believe that it will suddenly leapfrog Apple and Google in enough areas to matter.

Some have told us that RIM's enterprise sales force will play a big role, however, especially as Microsoft is absent in the market. Then it could be a race against HP for the corporate tablet market, if a corporate tablet market develops that's different than the consumer market.

So there is a chance that some of RIM's enterprise customers will dabble with the PlayBook, as well as some of RIM's most devoted BlackBerry customers. (Especially if it runs Android apps, as reported. It will have to run them well, though; not just poorly.)

But we have a very hard time seeing RIM capturing more than 10% to 15% of the tablet market.

Palm WebOS / HP

Dan Frommer, Business Insider

Having observed the HP TouchPad in person for several minutes at Mobile World Congress in Barcelona, we can confirm that it is indeed a high quality device. (Not as nice as the iPad 2, but nicer than many of the other tablets we've seen.)

But HP is late to the game, with a platform that has very little support from developers. And we have no idea how much the TouchPad will cost.

We can't think of any compelling reasons that a consumer would rush out to buy a WebOS instead of an iPad. Perhaps HP is betting that there will be a separate enterprise market than the consumer market, and that it will be able to sell into that market very well. Given how underwhelmed we were with the BlackBerry PlayBook, and how far behind Microsoft is, it may have a chance.

Microsoft

Microsoft is lost in tablets. After showing off this HP "slate" at CES in 2010 (which never shipped), and having a promising skunkworks tablet project "Courier" go to junk, Microsoft is in trouble.

Its PC partners like Dell, HP, and Toshiba seem to have moved on. Windows Phone 7 doesn't seem to be ready for tablets. Windows 7 doesn't either. But tablets just aren't going away.

It's almost as if Microsoft is asleep at the wheel.

Perhaps it will have to buy RIM to play here? Or hope its deep partnership with Nokia can do the trick?

Facebook?

Facebook is already your homepage. Why shouldn't it be the basis for a tablet platform?

Sure, this has nothing to do with Facebook's business today.

But we've always heard that Facebook is a lot more ambitious than anyone thinks. That it wants to be that third titan of Silicon Valley, along with Apple and Google.

That it wants to be a platform, and not just a service. This is why Facebook is supposedly making a custom version of Android. And this is why we wouldn't put it past Facebook to develop its own tablets.

If there's a brand that consumers would respond to as much as Apple and Google, it's Facebook. So why not try everything?

Amazon?

The Kindle is a terrific e-reader. Will Amazon jump into the more sophisticated tablet fray?

Rival Barnes & Noble arguably offers a tablet via the Android-powered Nook Color. So far, it's limited mostly to reading, but it could become more useful over time.

Will Amazon make a Kindle tablet, either using Android or its own software? Or will it stick to making the Kindle the best e-ink reader possible, at the lowest prices? (And using its Kindle apps on all other platforms.)